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From the editorial advisory board: Minimum wage

Posted:
02/23/2013 12:47:22 PM MST

Updated:
02/23/2013 02:38:49 PM MST

This week's question: President Barack Obama has proposed raising the minimum wage to $9 an hour, up from its current $7.25 per hour (it's $7.78 per hour in Colorado.)Here's what members of the EAB think.

According to the Labor Department, the purchasing power of the federal minimum wage, after adjusting for inflation, has dropped 20 percent since 1967.

At some level, higher minimum wages may cause job losses, but available data indicate this is unlikely to occur with an increase from $7.25 to $9 (about $18,000 per year). The bad news: making ends meet is still difficult. The good: such increased wages are spent locally, and right away. Given the multiplier effect and velocity of money, positive things happen to an economy when it is fed from the bottom up.

Since states are permitted to set minimum wages higher than the federal rate, where state differences are significant they create laboratories at shared borders.

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In 2007, while Idaho was content with the federal minimum wage of $5.15, the state of Washington had the highest minimum wage in the country at $8. Noting this discrepancy, critics of higher minimum wages declared confidently that the economy of Spokane

Valley, Washington, would suffer when compared to Post Falls, Idaho, just

8 miles away.

The New York Times examined the two communities on either side of the border and determined it was the economy in Washington that prospered

(Feb. 14, 2013). Although prices did rise on the Washington side, the higher wages led to increased spending, which "floated more boats" than the more austere approach in Idaho. Facts are stubborn creatures, and public policy should be based on them.

The federal minimum wage began in 1938 at 25 cents per hour. In 1964 my summer job paid a minimum clear up at $1.25, minus 3 cents for my union dues (separate story). The minimum wage was never intended to be a living wage, nor a fair one, nor to carry a worker above the poverty line. It has been a unique American invention, an anti-predatory, dignity wage, forever to prevent crowds of Pa Joads from bidding the price of their labor to zero.

The wage has been condemned and applauded ever since. Honestly, it neither harms entry-level employment nor particularly helps the economy, but it has been the right thing to do. One of those social contract thingamajigs.

Cautions: it is a bad idea to increase wages faster than productivity or inflation. This proposal from $7.25 to $9 is an 18.9 percent hike, absurd in a time of the lowest inflation since the minimum wage began. Second, someone has to pay the wage, which as economic stimulus falls close to zero-sum. Small businesses, the weakest in today's economy, are heavy with minimum wage payrolls.

I have no objection to a modest increase. But that is not the purpose of this overlarge grandstanding. Its intent is political gotcha, to embarrass Republicans, who need no help with that. Another left grab at their free-money fantasy begets the Tea Pots' reflexive, "We're okay and you're on your own."

For 75 years there has been a federal minimum wage in place, serving us well as a basic protection for the living standard of working people. This long history provides plenty of data for evaluating the advantages and disadvantages of wage standards.

Paul Krugman's recent commentary on this subject explains why we need to look beyond Economics 101. He shows there is little historic evidence that minimum wage increases cause job loss or result in undue inflationary pressure. He sites many studies and expert opinions that explain why the rules that apply to commodities cannot be applied to human resources. The interactions are much more complex.

With the proposed $9 minimum wage, a person working a 40 hour week would be brought roughly to the poverty level for a family of three. This is a low bar to set. If the minimum wage had been adjusted since its historic high, taking into account inflation and the skyrocketing productivity of the American worker in recent decades, analysts have shown we would be at over $16 today. Given how far behind we've allowed ourselves to get, the proposed increase seems very modest indeed.

To avoid falling behind again, it would be wise to implement the President's proposal that the minimum wage adjust with inflation yearly (as it does in Colorado). Public opinion is strongly in favor of the new minimum, with polls showing over 70 percent support, so let's get this done.

Eliminating poverty should be our goal. Unfortunately, raising the minimum wage won't do the trick. Its effects will be to slightly raise the income of a few, increase unemployment among the young and unskilled, cause small businesses on the edge of profitability to close, marginally weaken the economy, and increase prices.

Despite extensive studies, the most that can be said is that it might help a little or even harm those it is intended to help. The key factor is whether the minimum wage is near that point where the cost of hiring workers is close to the value of their services. If their cost exceeds the value of their work, employees will be laid off, forcing employers to outsource, automate, or downsize.

The overall effect of raising the minimum wage is puny. It's the least effective way of reducing poverty. Most jobs do not even fall into any of the categories it covers. Moreover, a 2007 CBO report found that earned income tax credits (EITC/EIC) help the poor more and with a lower cost to the economy. But the best way to help is to boost the economy overall by removing burdens from job creators so their businesses become more profitable and they can hire more people at higher wages.

Raising the minimum wage doesn't boost the economy; it merely shuffles money around, giving workers only a temporary boost. The most vulnerable of our society deserve better than that.

The minimum wage question should be viewed from a broad societal perspective. Businesses operate in a community of suppliers, employees, customers and neighbors. Enterprises thrive when their communities thrive. If a business isn't able to pay its employees a living wage then there is something wrong with their business model. The same is true of companies that create waste that they don't clean up, or a business that is a disruptive force in their neighborhood.

Some companies with large profits aren't paying the true costs of their enterprise. They create externalities that the whole community pays for. For example, many Walmart employees need food stamps and Medicaid to supplement their subsistence wages. Taxpayers get the bill for cleaning oil spills and other industrial accidents and Love Canal neighbors paid the cost of polluting with their lives.

What is the living wage? In a perfect world companies would know and willingly pay the living wage in their community. But this is not a perfect world and $9 an hour is both an economic and political calculation of a fair, but minimal wage.

A business that doesn't pay its way shouldn't be dragged along on the backs of underpaid employees or the rest of the community. Otherwise we are just like China and India and Bangladesh. Let's get out of the race to the bottom. Instead, let's aspire to raise up our communities and our businesses together. That will be good for all of us.

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